JUDGMENT
Chandurkar, J.
1. The assessee-company carries on business in the manufacture of vegetable oil. In the assessment for the assessment year 1959-60 the assessee had made a profit or Rs. 10,342 in non-speculative business and it claimed that this profit should be set off against the loss in non-speculative business brought forward since the year 1954-55. The assessee further claimed that the balance of the non speculative loss for the year 1954-55 should then be set off against the speculative profit of Rs. 25,570. The current year’s depreciation for the assessment year 1959-60 to which the assessee was entitled amounted to Rs. 35,769, and according to the assessee this should not be absorbed at all against the profits of the assessment years 1959-60, but should be added to the deprecation brought forward from the earlier years and should be carried forward to the next year. The obvious intention was to see that the deprecation of the current year could be set off in future years and the business loss brought forward from the year 1954-55 could be set off before it becomes impermissible for set off at the end of eight years.
2. The ITO declined to allow the current year’s depreciation to be carried forward, and he adjusted the current year’s depreciation amounting to Rs. 35,769, and determined the loss from non-speculative business at Rs. 25,769, and determined the loss from non-speculative business at Rs. 25,427. This loss was adjusted by him against speculation profit of Rs. 25,570. Thus the figure of profit arrived at was Rs. 143. This meagre amount was then adjusted against the loss brought forward from the year 1954-55, which was a sum equal to Rs. 3,21,854. As the assessee’s contention that the current year’s depreciation should not be taken into account before determining the profit, but instead loss from non-speculative business should be adjusted first was rejected by the ITO, the assessee appealed to the AAC, who upheld the order of the ITO.
3. The assessee then appealed to the Income-tax Appellate Tribunal. The Tribunal took the view that the current year’s depreciation had to be clearly distinguished from unabsorbed depreciation of the earlier years and that current year’s depreciation was a clear charge before determining the profits of the business of the current year before any question of choice between unabsorbed depreciation and unabsorbed losses of earlier years could be considered. The Tribunal found that s. 24(2) of the Indian I.T. Act, 1922, ensures priority to earlier years’ losses only against unabsorbed depreciation allowance brought forward from earlier years. Arising out of the order of the Tribunal, the following two question of law are referred under s. 66(1) of the Indian I.T. Act, 1922 :
(1) Whether, on the facts and in the circumstances of the case, non-speculative business profits of Rs. 10,342 should be set off against brought forward business losses of the earlier years before making any adjustment for depreciation for the year in question ?
(2) Whether, on the facts and in the circumstances of the case, the losses in non-speculative business brought forward from earlier years could be set off against speculation profit earned for the assessment year 1959-60, before considering the set off the current year’s loss in non-speculative business against speculation profits ?
4. The learned counsel for the assessee did not press question No. 2 and it is, therefore, not necessary to answer question No. 2. The argument that the current year’s depreciation should be allowed to be carried forward and the loss from non-speculation business should be given priority to be adjusted against the profits of the assessment year 1959-60 has again been advanced before us. It is obvious that this argument is founded on the view taken by the Allahabad High Court in Mother India Refrigeration Industries (P.) Ltd. v. CIT [1971] 80 ITR 510. In that decision the Allahabad High Court has taken the view that if, under proviso (b) to s. 24(2) of the Indian I.T. Act, 1922, business losses have to be given priority over unabsorbed depreciation allowance, and under proviso (b) to s. 10(2)(vi), depreciation allowance which is carried forward merges into depreciation allowance for the succeeding year and after such merger, the unabsorbed depreciation allowance is to be deemed to be depreciation allowance for the current year, “there is no good reason why business losses which have been brought forward should not receive priority over current depreciation allowance”. If the decision of the Allahabad High Court is to be accepted as laying down the correct law, then obviously the contention on behalf of the assessee will have to be accepted. Mr. R. J. Joshi, advocate, appearing on behalf of the Revenue, has, however, referred us to two decisions-one of the Gujarat High and another of the Andhra Pradesh High Court – wherein the view taken by the Allahabad High Court has been expressly dissented from and it is pointed out that the current year’s profit against which the business losses have to be set off cannot be adequately determined unless depreciation for the current year is taken into account on the basic principles of accounting. CIT v. Gujarat State Warehousing Corporation [1976] 104 ITR 1, is no doubt a decision which arose under the I.T. Act, 1961, but the same principles which govern the construction of ss. 72(2) and 32(2) will apply in the case under the old Act where the relevant provisions were s. 24(2), proviso (b), and s. 10(2)(vi), proviso (b). Since the Gujarat High Court has elaborately discussed the matter and since we are in agreement with the view taken by the Gujarat High Court, it will suffice for us to refer to the view which the Gujarat High Court has taken. The Division Bench of the Gujarat High Court has pointed out that under s. 72(2) priority to carried forward losses is to be given only where an allowance or part thereof is to be carried forward and that current year’s depreciation is not a carried forward depreciation and when a question and when a question arises as to whether carried forward losses should be given priority in adjustment over current year’s depreciation, s. 72(2) has no application. It was also pointed out that the definition “income” given in s. 2(24) shows that “income” includes profits and gains and the expression “profits and gains” means net profits and gains and further net profits and gains could not be ascertained without debiting the current year’s depreciation to the profit and loss account. The Gujarat High Court referred to Spicer & Pegler’s book on Practical Auditing and William Pickles’ Book on Accountancy, and pointed out that the basic principles of accountancy show that before carried forward carried forward losses are adjusted against the profits and gains of business for the purposes of the particular assessment year, the current depreciation for that year must be deducted in order to arrive at the correct figure of net profits or gains. The Gujarat High Court found that these principles have been given judicial recognition by the Supreme Court in Jaipuria China Clay Mines (P.) Ltd. v. CIT [1966] 59 ITR 555. In that case, the Supreme Court has pointed out that the various allowances mentioned in s. 10(2) of the Indian I.T. Act, 1922, have to be deducted from the gross profits and gains of a business and observed that, according to commercial principles, depreciation would be shown in the accounts and the profit and loss account would reflect the depreciation accounted for in the accounts. Thus, the decision in Jaipuria China Clay Mines (P.) Ltd v. CIT , showed that the taxable profits and gains from a particular business could not be ascertained without deducting the current year’s depreciation from the profits and gains. The Gujarat High Court, thus, expressly dissented from the view of the Allahabad High Court, thus, because, basic principles of accountancy, net profits which are chargeable to tax could not ascertained without deducting the current year’s depreciation, and the carried forward losses could not, therefore, be given priority over the current year’s depreciation.
5. A similar question fell for consideration before the Andhra Pradesh High Court in Addl. CIT v. Andhra Printers Ltd. [1979] 117 ITR 555. That was case in which the assessee, which carried on the business of printing and publishing a daily newspaper and a weekly journal, claimed depreciation for the relevant assessment year 1970-71 in a sum of Rs. 1,87,303, whereas its income before deduction of depreciation was only Rs. 70,555. The assessee had claimed that the carried forward business loss should be set off against the income of the current year before deducting the depreciation of the relevant assessment year. The Andhra Pradesh High Court took the view that s. 32(2), which corresponded to s. 10(2)(b) of the 1922 Act, which provides for set off of unabsorbed depreciation against current year’s income and allows the carried forward business loss determined under s. 72(1) which corresponded to s. 24(1) of the 1922 Act, to take priority for the purpose of set off against the revenue income of the relevant assessment year, does not apply to the case of assessment of current year’s income governed by s. 32(1), which provides for deduction of depreciation relating to plant, buildings and machinery, etc., in respect of the assessment year itself and which was not subject to s. 72(2). It was pointed out by the Andhra Pradesh High Court that, in the first instance, the income of the current year must be ascertained, for the determination of which depreciation of the relevant accounting year must be determined and the same should be deducted from the revenue income of the relevant accounting year in accordance with ss. 30 to 43 of the I.T. Act, and it is only thereafter that the question of set off of the business loss carried forward by the assessee against the revenue income arises. Thus, according to the Andhra Pradesh High Court, the business losses carried forward from the previous years cannot receive priority over the current depreciation allowance.
6. We are in respectful agreement with the view taken by the Gujarat High Court and the Andhra Pradesh High Court which is based on basic principles of accountancy. The decision of the Allahabad High Court does not disclose any reasoning on which the learned judges came to the conclusion they did. In this view of the matter, question No. 1 has to be answered in the negative and against the assessee.
7. Accordingly, question No. 1 is answered in the negative and against the assessee. Question No. 2 is not answered as not pressed. The assessee to pay the costs of this reference.
